Morning Report: Dragon tail risk 1/5/16

Stocks are lower this morning on no real news. Bonds and MBS are flat

The ISM New York ticked up to 62 from 60.7 in December.

House prices rose 0.5% month-over-month and are up 6.3% year-over-year, according to CoreLogic. Home prices remain 7.3% below their April 2006 peak. Note the FHFA House Price Index has recouped its post-bubble losses.

“Dragon tail risk” is the new moniker for China risk. Overnight, the government signaled that restrictions on selling in their stock market will remain in place after they expire this week. Even if the Chinese economy “only” grows 4%, it will have effects on the global economy, particularly Asia. It would probably lop a half of a point worth of GDP from the US as well. UBS gamed out the scenario and they predict it would slow the Fed’s pace of tightening, but not stop it.

The bigger question for China is what happens when their real estate bubble bursts. If that happens, 4% GDP growth may be optimistic. The reverberations will almost certainly be felt in the US real estate market, especially at the high end in the big pricey urban markets like NYC, SF, and Seattle.

After the weak ISM numbers yesterday, the Atlanta Fed took down their estimate for Q4 GDP growth from 1.3% to 0.7%.

Byron Wein’s predictions on 2016: Another down year for the S&P, the 10 year holds below 2.5% and Hillary defeats Ted Cruz. Oil stays in the 30s, and the Fed only hikes once, in March.

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